Tuesday, August 31, 2010

Looking at the latest release of the OECD economic indicators for China, it appears that the massive jump in economic activity seen since the panicky period of late 2008 is drawing to a close.

China’s leading economic indicator has now declined for seven consecutive months with the latest June period showing a notable month-to-month slump of 0.18% leaving the latest level just 0.59% above the level seen in June 2009.

Looking at past recessionary periods, it’s important to note that while China’s economy is clearly slowing, it will take some time to determine the severity.

We may be seeing the beginnings of an abrupt pullback of equal and opposite force to that of the government sponsored propping applied during 2009 or simply a slowing of a more durable overall recovery as was seen during the periods following the 1990s and early 2000s recessionary periods.

Industrial production has fallen off a cliff, consumer confidence continues to plunge to historic lows, business confidence has made a sudden flagging reversal and the leading index is turning down fast.

For June, consumer confidence declined 0.63% since May dropping 4.35% below the level seen in June 2009 while business confidence remained largely flat.

Industrial production remains weak with the latest data point increasing slightly off of the lowest level seen since the late 1990s while the leading index is fully in declined dropping 0.61% from May and declining 4.27% below the level seen in June 2009.

The OECD leading indicator, industrial production, business confidence and consumer confidence series all disclose important and timely clues to the state of each respective economy or group of economies (bookmark the live dashboard).

The latest monthly results indicate that for June the total leading index showed the first monthly decline since the current expansion began, dropping 0.03% since May but remaining 3.45% above the level seen in June 2009.

Total Business confidence registered the second consecutive monthly decline dropping 0.19% since May though remaining 5.47% above the level seen in June 2009.

Total Consumer confidence also declined with the total index dropping 0.20% since May remaining 1.84% above the level seen in June 2009.

It's important to note that since the CSI data is a three month rolling average, it will take until the July reporting period (i.e. the September release) to get beyond the majority of tax stimulated home sales so it will take some time to see what the true "organic" (non-stimulated) housing trends look like.

Further, as BostonBubble points out, since Congress moved to extend the closing deadline for the credit until September, the CSI data may not be free of the distortion until the February 2011 release!

The 10-city composite index increased 5.01% as compared to June 2009 while the 20-city composite increased 4.23% over the same period.

Topping the list of regional peak decliners was Las Vegas at -56.65%, Phoenix at -51.20%, Miami at -47.69%, Detroit at -44.87% and Tampa at -41.80%.

Additionally, both of the broad composite indices show significant peak declines slumping -28.83% for the 10-city national index and -28.35% for the 20-city national index on a peak comparison basis.

The following chart (click for larger version) shows the percent change to single family home prices given by the Case-Shiller Indices as compared to each metros respective price peak set between 2005 and 2007.

The following chart (click for larger version) shows the percent change to single family home prices given by the Case-Shiller Indices as on a year-over-year basis.

The following chart (click for larger version) shows the percent change to single family home prices given by the Case-Shiller Indices as on a month-to-month basis.

Additionally, in order to add some historical context to the perspective, I updated my “then and now” CSI charts that compare our current circumstances to the data seen during 90s housing decline.

To create the following annual charts I simply aligned the CSI data from the last month of positive year-over-year gains for both the current decline and the 90s housing bust and plotted the data with side-by-side columns (click for larger version).

What’s most interesting about this particular comparison is that it highlights both how young the current housing decline is and clearly shows that the latest bust has surpassed the prior bust in terms of intensity.

The “peak” chart compares the percentage change, comparing monthly CSI values to the peak value seen just prior to the first declining month all the way through the downturn and the full recovery of home prices.

Although this is a notable development particularly in light of the fact that Fannie Mae’s serious delinquency had been rising for over two years, more data is needed before any conclusions can be drawn as to the trend going forward.

In June, 3.74% of non-credit enhanced loans went seriously delinquent while the level was 11.68% of credit enhanced loans resulting in an overall total single family delinquency of 4.99%.

The following charts (click for larger ultra-dynamic and surf-able chart) show what Fannie Mae terms the count of “Seriously Delinquent” loans as a percentage of all loans on their books.

It’s important to understand that Fannie Mae does NOT segregate foreclosures from delinquent loans when reporting these numbers.

It’s clear from the president’s Rose Garden address today that the administration is fully aware of the significance of the weakening macro trends and associated loss of consumer and business confidence and, more importantly, the loss of general confidence in the administration’s ability to deal with our troubled economic times.

Only a few months ago the president and top economic advisers were out in advance of the monthly Employment Situation report trumpeting the number of jobs “saved and/or created” all the while preparing a forthcoming PR sweep dubbed the “summer of recovery”.

Now with the economy clearly faltering and Keynesian policy junkies like Laura Tyson and Paul Krugman pulling for more government boondoggles while polls and large populous movements appear to indicate a major case of economic stimulus fatigue on the part of American voters, one has to wonder what the administration will do next.

Will they move toward across-the-board tax breaks in order to stimulate without further jeopardizing their standing in the upcoming elections or will they continue to plan targeted policy action like additional housing tax scams and clunker gimmicks?

One would think that with the housing tax credit sham now being generally accepted as failed policy, wasting billions of dollars merely postponing the inevitable while creating more uncertainly and disrupting the natural market clearing process, the administration would move away from targeted stimulus trickery, yet given the president’s statements that the administration is “hard at work” planning a “full-scale attack” on our troubled national economy it’s hard to shake the sense that more Keynesian malfeasance is about be unloaded on us all.

How much more of this flimflam policy can our withering and feeble private economy take?

There are rumors of “new ideas” related to foreclosure prevention, class oriented mortgage refinancing and debt forgiveness action, possibly additional housing credits and even small business tax credits for simply maintain current employment levels but what the economy really needs is less big government command-economy style Keynesian delusions and more real leadership.

The current production index declined to -0.1 as the current volume of new orders index remained firmly in contraction for a third consecutive month at -9.3 and the current employment index declined to -5.1.

These results are effectively confirm other regional measures of manufacturing activity (Philly Fed, Empire state, ISM PMI, etc.) which, taken as a whole, now clearly indicate that nationwide manufacturing activity has slowed significantly in the last several months.

The current Radar Logic 25 MSA Composite data reported on residential real estate transactions (condos, multi and single family homes) that settled as late as June 25 indicates that the final expiration of the government's tax gimmick drove a second, albiet more tepid, price bounce with prices increasing slightly since May but remaining below the tax credit fueled peak reached last year.

Look for tomorrow's S&P/Case-Shiller home price report to reflect an increase of prices as the source data moves further through months affected by the tax credit activity.

As I have noted before, one of the most interesting and damming bits of evidence that tipped many off to the existence of a significant real estate bubble during the early 2000s was the fact that dramatically increasing property prices were occurring in most industrialized nations.

The U.S., U.K., France, Ireland, most of continental Europe, Canada, Australia and elsewhere were all simultaneously experiencing significant property booms thereby thwarting, more or less, many of the “limited supply” and “Superstar Cities” arguments that sought to justify individual regions explosive appreciation.

Today we know that this massive boom in real estate was more a function of financialization and credit availability rather than fundamentals.

The latest data from the Institut de l'Epargne Immobilière et Foncière (IEIF), a French research and analysis firm, suggests that property prices in France and Europe declined slightly during August but still remained slightly higher then levels seen a year ago.

The latest release of the two most prominent home price indices for the United Kingdom are signaling that the trend up in U.K. home prices is continuing though at a slower pace than seen earlier in the year.

The “Nationwide” series, indicated that U.K. home prices declined slightly since last month but increased 6.59% on a year-over-year basis while the “Halifax” series indicated that prices showed an increase of 4.93% over the same period.

Both indices are similar to our own S&P/Case-Shiller data series in that they both implement a methodology that seeks to standardize the quality homes included as source data and track the price changes occurring between sales instead of simply tracking the distorted average or median sales price.

The following chart (click for full-screen dynamic chart) show the price movement since 1991 to each index.

On a year-over-year basis real GDP increased 2.98% while the quarter-to-quarter non-annualized percent change was 0.40%.

A note of caution... as I pointed out last October, the BEA seriously overestimated the rebound in fixed residential investment first estimating that Q3 2009 came in at +23.4%, a faster rate than any during the entirety of the housing bubble.

This "estimate" was more than suspicious, it was just flatly wrong and now, after multiple revisions, reflects a much more tepid 10.6% rate.

And yet now, for Q2 2010 the BEA is again estimating that fixed residential investment expanded at a rate of 27.2%!!

With results like these, it's safe to say that the BEA is having serious trouble with accuracy, possibly as a result of the severity our current decline, and that these GDP report should be viewed with a high degree of skepticism.

Thursday, August 26, 2010

Today’s jobless claims report showed a decrease to both initial claims and continued claims with a notable trend-up appearing to shape up for initial claims while continued claims continues to flatten.

Federal extended benefits appears to be continuing to mount likely as a result of the recent extension of unemployment insurance adding another 300 thousand new long term unemployed on the extended benefit roll.

Seasonally adjusted “initial” unemployment declined by 31,000 to 473,000 claims from last week’s revised 504,000 claims while “continued” claims declined by 62,000 resulting in an “insured” unemployment rate of 3.5%.

Since the middle of 2008 though, two federal government sponsored “extended” unemployment benefit programs (the “extended benefits” and “EUC 2008” from recent legislation) have been picking up claimants that have fallen off of the traditional unemployment benefits rolls.

Currently there are some 5.83 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 4.29 million people that are currently counted as receiving traditional continued unemployment benefits, there are 10.12 million people on state and federal unemployment rolls.

The following chart shows the recent trend in initial non-seasonally adjusted initial jobless claims with the year-over-year percent change acting as a rough equivalent of a seasonally adjustment.

Historically, unemployment claims both “initial” and “continued” (ongoing claims) are a good leading indicator of the unemployment rate and inevitably the overall state of the economy.

The following chart shows “population adjusted” continued claims (ratio of unemployment claims to the non-institutional population) and the unemployment rate since 1967.

Adjusting for the general increase in population tames the continued claims spike down a bit.

The following chart (click for larger version) shows “initial” and “continued” claims, averaged monthly, overlaid with U.S. recessions since 1967.

New single family home sales plunged 12.4% since June and a whopping 32.4% below the level seen in July 2009 while the monthly supply jumped up to 9.1 months and the median months for sale declined to 11.3 months.

These results provide even more evidence that the government's housing tax scam policy was ultimately a complete and total failure accomplishing nothing but creating a temporary distortion of the underlying "organic" housing trends.

With numbers this weak, it could even be argued that the government's tax gimmick ultimately further destabilized the nation's home markets by injecting a substantial amount of uncertainty, sponsoring feeble home buyers and preventing the natural market clearing mechanism from playing out.

The following charts show the extent of sales decline (click for full-larger version)

The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.

The latest data is showing that the average rate for a 30 year fixed rate mortgage decreased 5 basis points since the last week to 4.55% while the purchase application volume increased just 0.6% and the refinance application volume increased 5.7% over the same period.

It's important to note that with the final expiration of the governments massive housing tax credit subsidy, home purchase activity has been trending down precipitously despite falling interest rates.

The purchase application volume remains near the lowest level seen in well over a decade.

The following chart shows how the principle and interest cost and estimated annual income required to cover the PITI (using the 29% “rule of thumb”) on a $400,000 loan has changed since November 2006.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages over the last number of weeks (click for larger version).

The following charts show the Purchase Index, Refinance Index and Market Composite Index since November 2006 (click for larger versions).